FINRA recommends that firms automate trade reporting processes to greatest extent possible.

[ by Howard Haykin ]

FINRA is speeding up trade reporting for OTC equity transactions executed during the hours that the FINRA trade reporting facilities ("TRFs") are open.  The changes also apply to trade cancelations, as well as stop stock and prior reference price trades.

As reported in FINRA Regulatory Notice 13-19, beginning Monday, 11/4/13, firms will be required to report OTC  transactions in equity securities to FINRA as soon as practicable, but no later than 10 seconds, following execution. With respect to trades that are reported manually, FINRA will take into consideration the complexity and manual nature of the execution and reporting of the trade when reviewing for firm compliance with the new reporting time frame.

Cancelation of trades executed during normal market hours and canceled during normal market hours on the date of execution must be reported as soon as practicable, but no later than 10 seconds, after the time of cancelation. 

Trades not reported within 10 seconds of execution, unless expressly subject to a different reporting requirement or excluded from the trade reporting rules altogether, are late, and such trades are not considered “last sale” eligible under the Consolidated Tape Association Plan (CTA Plan) and Nasdaq Unlisted Trading Privileges Plan (UTP Plan).

New Supplementary Material in FINRA Rules 6282, 6380A, 6380B and 6622 clarifies ... the requirement that firms report trades and trade cancelations “as soon as practicable.”

• Firms must adopt policies and procedures reasonably designed to comply with this requirement.
• Firms must implement systems that commence the trade reporting process without delay upon execution (or cancelation, as applicable).
• Where a firm has such reasonably designed policies, procedures and systems in place, the firm generally would not be viewed as violating the “as soon as practicable” requirement because of ......... 

• delays in trade reporting due to extrinsic factors that are not reasonably predictable, and
• where the firm does not purposely intend to delay the reporting of the trade - e.g., TRF systems issues.

• Firms must not purposely withhold trade reports,

• e.g., by programming their systems to delay reporting until the last permissible second.

Patterns or Practices of Late Reporting.     With respect to the 10-second reporting requirement, FINRA will continue to look for a pattern or practice of unexcused late trade reporting before taking action against a firm.  Pursuant to Rules 6181 and 6623, unexcused late reporting occurs when there are “repeated reports of executions submitted after the required time period without reasonable justification or exceptional circumstances.”

The rules also provide that “[e]xceptional circumstances will be determined on a case-by-case basis and may include instances of system failure by a member or service bureau, or unusual market conditions, such as extreme volatility in a security, or in the market as a whole.”  Firms that engage in a pattern or practice of unexcused late reporting - i.e., reporting later than 10 seconds after execution - may be charged with violating FINRA rules, notwithstanding that they have policies and procedures that contemplate commencing the trade reporting process without delay.

Automate Trade Processes, If Not There Already.    FINRA believes that firms should automate their trade reporting processes to the greatest extent possible, consistent with their trading style used to provide best execution to customers, and where automation is not feasible, they should implement more efficient trade entry processes to meet the 10-second reporting requirement. FINRA expects that firms will periodically assess their systems and processes to ensure that they have implemented the most efficient policies and procedures for timely trade reporting.

Manual Trade Reporting.     For that small universe of trades for which the trade details must be entered manually, the trade reporting process might not be completed within 10 seconds following execution, even where the firm has established efficient reporting processes and commences to report the trade without delay.

That's why new Supplementary Material in Rules 6282, 6380A, 6380B and 6622 provides that FINRA will take such factors as the complexity and manual nature of the execution and reporting of the trade into consideration in determining whether “reasonable justification” exists to excuse what otherwise may be deemed to be a pattern or practice of late trade reporting. Among other things, FINRA will consider:

• the complexity of a trade (e.g., a volume weighted average trade or an options-related trade) and size of a trade (e.g., a trade that involves a basket of securities),
• the fact that some amount of time must elapse between the commencement of the manual trade reporting process and the reporting of the trade.

The Supplementary Material applies only where the details of a trade must be manually entered or typed into a trade reporting system following execution. Firms must maintain, and provide upon request, documentation sufficient to demonstrate that a trade was reported late due to the manual nature of the trade entry process following execution.

FINRA Staff Contacts.   Direct questions to:   Market Regulation, Legal Section, at (240) 386-5126;  FINRA Operations at (866) 776-0800; or  Office of General Counsel at (202) 728-8071.

For further details, go to:   [ FINRA RegNote 13-19, May 2013 ].